Don't be led up the garden path over home loan costs

Even when lenders offer very attractive headline rates, the chances are they'll be coming up with increasingly innovative ways to claw money back Alamy

When it comes to mortgages, there's good news and bad. While the number of loans available has increased over the past year, so have the costs. A study by Moneyfacts.co.uk suggests fees levied on home buyers are up almost 70 per cent.

Average charges paid have shot up £607 in the last 12 months, from £904 to £1,511, according to data compiled to June. This remarkable increase has been blamed on a combination of factors relating to the global financial crisis.

"The cost of funding has risen sharply for lenders and so borrowers are finding upfront costs are becoming more expensive," says Rachel Springall of Moneyfacts. "Higher lending charges have also dissipated with higher fees counteracting them."

Even when lenders offer very attractive headline rates, the chances are they'll be coming up with increasingly innovative ways to claw money back so borrowers need to analyse exactly how the charges are likely to rack up over time.

This means there is now a vast array of solutions available in the marketplace, says David Hollingworth of the mortgage broker London & Country.

In some cases, borrowers can find deals with no arrangement fees and free legal work, albeit in exchange for a slightly higher interest rate.

"Choice is really good because it means you're not stuck to one type of product that may or may not fit your circumstances," he says. "However, it also means you've got to work through what can be quite a large number of different deals in an effort to work out which is best for you."

So what are all these costs and how can you cut them down to size?

Arrangement fee

This will probably be the most significant cost – and one that has been rising sharply. While it is still possible to find deals that only charge you around £500, it is not uncommon to be asked for five times that amount to get access to the best interest rates. you may find lenders waiving the arrangement fee, although this is likely to be in exchange for you paying a higher rate of interest over the mortgage term.

Valuation fee

This will vary depending on the property's value but will usually be a few hundred pounds. If it is a remortgage, the lender may use a desktop valuation rather than instructing a visit to the property itself.

This is computerised, which is quicker and cheaper, but can result in a valuation that sometimes doesn't chime with the opinion of the owners. In these cases the decision can be appealed, but this will cost you more. Some remortgaging deals offer a free valuation.

Those purchasing properties, meanwhile, may be advised to upgrade from a basic valuation to a home buyers' report or even a full structural survey to get more information about a prospective house. These can easily cost as much as £500 and £750, respectively.

Early repayment charges

These are fees that apply when the mortgage needs to be repaid early – such as if the property is being sold or the borrower wants to switch to another lender – so they won't apply to everyone, although they're still worth taking into consideration, according to Mr Hollingworth.

"These can work out to be 3 to 5 per cent of the amount you are repaying, so you need to think up front about how long you're prepared to lock in for a deal and the likelihood that you will need to review the arrangement before the end of the term," he says.

Many mortgage products allow you to make overpayments each year – typically around 10 per cent of the total borrowed – without incurring any early repayment charges. If you choose to use this facility, make sure you keep tabs on it as you don't want to be hit with a penalty.

Higher lending fees

These are less of an issue now that relatively few companies are offering to lend large loan-to-value (LTV) rates, but can be a headache for those borrowing 95 or 100 per cent of a property's value. In some cases, it can cost an extra £1,000 – on top of the usual arrangement fees – for the privilege of a lender agreeing to a high LTV rate.

Exit fees

Lenders don't like seeing you go, so will effectively punish you for walking away at the end of a term by levying an exit fee. There was a storm around these a few years ago when borrowers found the rate charged for this had increased between them taking out the mortgage and the end of the term. That has been tackled but you can still expect to pay up to around £300 to say goodbye.

Other fees

There are other assorted charges that may apply during the setting up process itself. For example, it is common for lenders to automatically charge you for a revaluation of your property unless you accept their mortgage offer within an agreed period of time.

Similarly, there will be other completion deadlines imposed which could result in a penalty of some description.

Other administration fees, meanwhile, include the telegraphic transfer of funds. This will vary between lenders but is usually around £35.

A raft of other fees may apply – depending on whether you need to make any changes to your mortgage agreements. For example, adding or removing names costs around £160 while you can expect to pay some £90 if you want further advances.

You will also get charged if you have difficulties keeping up with your mortgage payments and fall into arrears. If your lender needs to write to you, a management fee of around £35 could be charged. If it needs to instruct solicitors, this may cost more than £100. In the worst-case scenario, a decision to take a property back could result in you getting a £350 bill.

Comparing what's available

You have to do your homework, advises Nick Jukes at Hastings-based Phase Mortgage Solutions. "There seems to be no consistency to fees charged by lenders, with higher fees initially seeming to reflect the more preferential rates," he says. "Borrowers should take time in assessing the difference between the rates and level of fees as you should always work out the difference in the payments on the lower rates against the difference on the higher fees."

All aspects of a mortgage deal need to be taken into consideration, agrees Rachel Springall at Moneyfacts. "The only way borrowers can compare the cost is to ask their adviser for a 'true cost' projection; this will take into account all payments over the life of the mortgage," she says.

What's right for you will depend on your individual circumstances, according to David Hollingworth at London & Country.

The bigger the mortgage, the less the impact even a big flat fee will have because it's a smaller percentage of the mortgage amount. If you've got a smaller mortgage then the opposite applies and you should look around for deals where the fee structure is more moderate.

"To some people having a massive fee and a really low rate will be just what the doctor ordered," he says. "This is because they can save more back by having a low interest rate because they've got a bigger mortgage. They will end up saving the fee back and more over time."

You also need to factor in the length of the mortgage, points out Ray Boulger, senior technical manager at John Charcol. "Take the example of a two- and five-year fixed rate deal, both with arrangement fees of £1,000," he says. "The five-year deal will see an average cost of £200 a year, whereas over two years it would be £500."

Counting the cost: How two rival mortgage products measure up

We asked London & Country brokers to illustrate how various mortgage products can be compared, especially those in which there is a big difference in fees. For this, we looked at a couple of two-year fixed-rate deals based on a £150,000 remortgage over 25 years on a property worth £300,000.

HSBC

Two-year fixed-rate mortgage at 2.64 per cent up to 60 per cent with a £1,999 fee. Monthly payment would be £683.55

Total monthly payments:£16,405.20

Fee: £1,999

Valuation: £227

Legal work: Free

Total two-year cost: £18,631.20

NatWest

Two-year fixed-rate mortgage at 3.49 per cent up to 60 per cent with no fee, free valuation and free legal work. Monthly payment would be £750.13

Total monthly payments: £18,003.12

Fee: £0

Valuation: Free

Legal work: Free

Total two-year cost: £18,003.12

Conclusion

Despite carrying a higher interest rate, the deal that has been offered by NatWest works out to carry a lower total cost over the two-year period.